You don’t have to be a stockbroker or financial planner to become a successful investor. But from stocks to mutual funds, a beginning investor can easily get lost in the maze of stock market terminology. So what’s the difference between a stock and a mutual fund? And how do I get started investing in either one?
According to Bonnie Gentry, a certified financial planner for five years at Merrill Lynch in Scottsdale, Ariz., there are several differences between stocks and mutual funds.
"With stocks, you [the investor] have ownership in one company," Gentry said. "Mutual funds, on the other hand, provide more diversity and allow you to have ownership in several companies."
Another advantage mentioned by Gentry includes the fact that your money could also be invested in bonds within that fund or even as regular cash, allowing for the mutual fund company to make new stock purchases.
While mutual funds do provide greater diversity and therefore less risk, Arizona State University assistant professor of finance, John Griffin said there are still reasons for investors to be cautious.
"The fallacy of investing in mutual funds is that most people will say ‘Oh, since my mutual funds are diversified, I’m safe,’" Griffin said. "These mutual funds [managers] invest in the market just like regular stocks and they’ve gone down before as well."
However, Merrill Lynch’s Gentry still recommends mutual funds for first time investors looking for a safer alternative to stocks.
Once you’ve examined the risks involved, there are a number of ways to open and manage your own account Online brokers like Ameritrade and Datek, for example, are both free of charges when opening a new account, but have different prices when it comes to individual trades. Most companies will require a minimum starting investment of $1,000.
One such student that took on the risk of investing is Sarah Jennings, a 19-year-old supply chain management senior at Arizona State University. Jennings started investing one year ago and said her inspiration came from reading various books that described the importance of investing and how careful planning and solid long term investments could lead to a lucrative future.
"I read books such as ‘The Millionaire Next Door,’" she said. "The book spoke of the importance of tax-sheltered investments and making small investments that would pay off in the long run."
So, should the recent scandals surrounding companies like Enron and WorldCom, detract students from entering the market? Not for Jennings, who said most fears of investing in the market are typically unfounded and has not affected her decision to continue investing.
"It’s a slight concern," Jennings said. "One thing I did was check into was various [analyst] reports and the background of each company before investing. The reality is that you have to be willing to take on some risk."
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